Transferring A Property Letting Business To A Company
What's the tax going to be on that?
With the changes to the taxation of rental income for individuals, many are considering the benefits of transferring their property rental portfolio to a company ...
When transferring a property letting business, there's a lot to think about!
copyright: pogonici / 123rf stock photo (licensee)
However, there are many tax pitfalls for the unaware, some of which are covered by this blog post.
Capital Gains Tax (CGT)
For CGT purposes, the company will be deemed to be connected with the individual as the individual controls the company. As such, the transfer of the properties will be deemed to have taken place at market value for CGT purposes.
For example, if you acquired a property for £150,000, it is now valued at £250,000, CGT will be payable on the £100,000 growth in value, subject to any available reliefs and exemptions. CGT will be chargeable at either 18% or 28% depending on your Income Tax position.
However, if you have a property rental business (please refer to my blog post called Property Letting: Is It An Investment Or Business Activity?), you may be able to benefit from the reliefs available in section 162 of the Taxation of Chargable Gains Act 1992.
This allows, where the consideration is wholly or partly satisfied by the issue of shares in a company, for the capital gains arising to be deferred against the shares received.
The consideration for the shares will be the market value of the assets (less liabilities) transferred. The gains, therefore, become deferred against the shares and will only crystallise on a subsequent disposal of the shares.
If the consideration is only partly satisfied by shares, some of the gain will become chargeable immediately.
Stamp Duty Land Tax (SDLT)
Unfortunately, there is no such exemption for SDLT purposes. Whilst SDLT is only chargeable on the consideration received, where the transfer is to a connected company, it is again deemed to happen at market value. Therefore SDLT can be a significant cost of incorporation particularly with the additional 3% charge.
Where a partnership or LLP business is being incorporated, and the partners are close family members, it may be possible to transfer the property without an SDLT charge. This is due to the particular reliefs available when family members are in partnership and is not a blanket relief for partnerships.
Care must be taken to ensure that it is a partnership and is not just individuals co-owning a property. While none of these factors are in themselves conclusive, this may be the case where there are no partnership agreements, bank accounts and partnership tax returns have not been filed.
Individuals that convert to a partnership in order to make use of the SDLT exemption would fall foul of the SDLT anti-abuse rule and SDLT would become payable on the market value of the properties transferred.
As can be seen, these are complex tax issues and professional advice should be sought by anyone looking to transfer properties to a company.
"Would you like to know more?"
You can call me at Essendon Tax Consultancy on 0333 335 0427 or click here to send me an email enquiry and let's see how I can help you.
Until next time ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.